A basic case for innovation

a.k.a Why cost-cutting stifles innovation

Innovation has always intrigued me. It’s creative, fresh, new. It means making something out of nothing, something that didn’t exist before. Perhaps its also because I get bored easily like many people do.

One of the things that frustrate me most about businesses is when they get caught up in cost-cutting and straining every last bit of efficiency out of everything and everyone… “sweating the assets”. The main reason it irritates me is that this usually entails entirely losing sight of revenue creation.

I know there are limits - a business can’t just spend whatever with no control or regard for costs, but it shouldn’t go to the extreme.

Here I present a primary [and very simplified] case for innovation:

No innovation - consider a company that sells the same product over a period of ten years and doesn’t change anything. Generally increases in costs would probably outstrip price increases they can pass on, leading to reducing profitability, and eventually losses over the period for each company.

Cost-cutting - in this scenario, to combat the above effect, the company wakes up and realises they need to do something. Focusing on cost-cutting, they manage to squeeze suppliers and staff [killing so much value there, but that's a whole other story] for a few % every three years and pat themselves on the back for keeping the company profitable.

Innovation - in this scenario, the company takes a different approach and has a significant product innovation after five years that stimulates growth by entry into new markets or new customers and allows higher than average price increases [even though costs increase too]. This increases profitability and opens further doors for the company.

Like I said, a highly simplified approach, but I hope it gets my point across. In case it's not evident, my point is this: I am concerned that with so many investors seeking only profits and maximum profitability, innovation is discouraged, and this has a detrimental long-term effect not only on the company but the country and economy as a whole.

What do you say? Would you agree with this?